Two portfolio managers (and senior VPs) at Cohen & Steers, in a new white paper, make the case that “listed infrastructure is an attractive complement to private investments, providing long-term portfolio solutions for real asset allocations.” Cohen & Steers, a New York headquartered global investment manager, recommends that institutions allocate between 20% and 30% of their portfolio to real assets generally, and as part of that set a 3% to 7% target for listed infrastructure.
The authors begin with the premise that finding good private infrastructure investments is becoming an increasingly difficult matter over time. More institutions are entering the market chasing the same opportunities. Asset values are rising and with that, the costs of making the wrong choice are increasing.
In 2013 alone, managers raised $41 billion from around the globe for 57 new private funds targeted at infrastructure projects, a sharp contrast with the mere $1 billion raised ten years before. The competition for opportunities that this suggests is only going to worsen.
Looking at the Listings
This situation is pressing firms to look beyond the private market, at listed infrastructure securities, which can serve a range of different functions in a portfolio, “as a sleeve in custom target-date funds, as an alternative investment offering in defined-contribution platforms, in wealth management firms’ discretionary asset allocation models, and as part of a broader allocation to real assets.”
The authors, Robert Becker and Benjamin Morton, (Mark Adams is also credited as the editor of the paper) say that they expect long-term return potential from listed infrastructure of 8% to 10%. This is a broader range (and, alas, broader on the downside) than the Preqin Infrastructure Index presumes for private infrastructure. As Becker and Morton say, Preqin’s index is priced for 9 to 10% returns.
Becker and Morton suggests a dual allocation strategy that includes both private and listed infrastructure projects as the best way to expose one’s self to the global need for rebuilding of deteriorating or obsolete structures in developed markets and the need for new capacity in emerging markets.
Small Overlap with Global Equity Portfolios
Becker and Morton say that there is an impression in some quarters that “global equity portfolios already offer exposure to infrastructure companies,” and that impression has kept some investors from looking into listed infrastructure. But that is an error. Of the 2,250 securities in the MSCI World Index, they also say, “only 90 are in an infrastructure-related subsector, representing just 3.9% of global equity market capitalization.” (They take that number from the UBS Global 50/50 Infrastructure & Utilities Index.)
A traditional equity portfolio, then, will likely hold only one or two infrastructure companies.
Another psychological block to greater use of the listed infrastructure space is the impression that the value of privately owned infrastructure assets is less volatile than the value of their publicly listed counterparts. Becker and Morton believe that this impression arises from the difference in the method of measurement, both of volatility itself and of performance. Appraisal based valuation entails a significant degree of smoothing.
On the whole, they believe, ownership structure doesn’t determine the long-term risk or return of real assets. The cash flow characteristics and the growth attributes of the assets themselves does that.
Of course, liquidity is always an issue with infrastructure investments. Capital in a private fund working in this space won’t be available for redemption for a period of years, perhaps a decade or more. Even for institutions with long-dated liabilities, this can be a nuisance, limiting opportunities to rebalance allocations. A dual infrastructure strategy, bringing a global listed portfolio into the picture, restores flexibility in that respect.
How large is the universe? Becker and Morton say that there are nearly 400 listed infrastructure companies and their combined market cap is approximately $3 trillion.
Further, there are some infrastructure investment themes that can be played only in this way. Investors “looking to target Chinese toll roads or Brazilian water will find few, if any, opportunities in the private market.” There are other themes that require the private market, or that are more commonly accessible there, such as “social infrastructure [in] schools and hospitals.” This brings Becker and Morton to their conclusion, which is that it is by investing in infrastructure within both ownership structures that investors will get the best of both worlds, and the best risk/return profile.